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Medical malpractice's softer side: medical malpractice rates and claim frequency have stabilized, but claim severity continues to rise.

Key Points

* Medical malpractice liability claims are stabilizing after years of a hard market.

* Tort reforms have eased the medical malpractice liability in some states. recently, defensive actions.

Medical malpractice writers are fighting back. That's the word from Frank Dodero, senior vice president of Aon Healthcare.

They are taking a stand by placing increased emphasis on patient safety initiatives, lobbying for tort reforms in several states, and defending nonmeritorious claims.

Dodero, who also is chairman of Aon's Management Committee for Healthcare, is referring to Aon's Hospital Professional Liability and Physician Liability 2006 Benchmark Analysis, which found that while hospital professional liability trends and the frequency of claims for hospital and physician liability have stabilized, the size of claims continues to rise, by 6%; the expense of defending claims continues to rise, by 17%; and the average amount paid to indemnify claimants continues to rise, by 3%. Aon is the second-largest broker worldwide according to the Best's Review list of Top Global Insurance Brokers.

Statistics aside, two major findings came out of the study, Dodero said. While hospital-professional and physician-liability claims are stabilizing, tort reforms alone are not enough to make claim frequency and severity decrease in the future. The cure: the medical malpractice industry must continue to focus on patient safety initiatives and quality of care to sustain a favorable frequency trend in the market.

The Hospital Professional Liability and Physician Liability 2006 Benchmark Analysis is based on loss and exposure data from more than 700 health-care facilities. It measures 47,735 claims representing more than $4.4 billion of incurred losses. Medical malpractice insurance includes three markets: hospitals, physicians and surgeons, and allied providers and facility businesses.

"While severity is up, it's interesting to see how it's up," Dodero said. "The defense attorneys are getting as aggressive as plaintiffs' attorneys when it comes to defense strategies in defensive claims that are nonmeritorious."

What Happened

Right now, medical malpractice insurers are beginning to drop prices, but only as they see they can afford to do so, not as a competitive incentive. "Competitors are lowering prices if they think clients deserve a lower premium," Dodero said."Particularly in the hospital arena, hospitals have taken on more risk themselves; they've raised their retentions so that the carriers feel more comfortable writing the risk at a higher retention.

"I think that's one of the reasons that rates have stabilized--people are taking on more risk from a self-insurance basis," Dodero said. During the hard market cycle, carriers were not willing to provide coverage unless hospitals and physicians took on higher retentions. "Or, if they did provide coverage, it was a dollar-for-dollar risk transfer"

Several other factors are softening the medical malpractice market, Dodero said:

* The industry is defending claims more rigorously than it has in the past.

* Patient safety initiatives have improved dramatically, and the focus on quality is way up.

* The condition of the stock market is another factor: "The equity market has gotten better since 2001 and 2000; carriers are able to make a better return on their investment."

The 2007 medical malpractice combined ratio is projected at 109%, which at its high in 2001 was 154%,he added.

"There's more capacity in the marketplace today; more markets are in play today, so you have more competition. The competition is not driving the flat rates, but it's certainly helping to keep them reasonable" Dodero said. Some of the capacity may be coming from the London and Bermuda markets, he said.

In the United States, four states with hard-hitting tort reform laws have lowered claims frequency: Texas, Pennsylvania, California and Florida, Dodero said. Greg Larcher, director and actuary of Aon Risk Consultants and author of the analysis, released a statement saying the impact of past state-level legislative reforms "has largely been realized" and the industry does not expect "significant decreases in claim frequency or severity resulting from tort reform in the future--unless other states pass legislation that withstands challenges." In addition, patient safety initiatives implemented now "may be critical for sustaining a favorable frequency trend into the future."

The Aon study backs this up with "true data," Larcher said. "In the long term, the industry would benefit from a more comprehensive measure of quality, beyond mortality, that measures the success of patient safety improvements and their impact on liability costs"

Nationally, the hard market for medical malpractice ended 18-to-24 months ago, said Richard "Rick" W. Mortimer Jr., vice president of HealthCare Professionals' Insurance Services, a Brown & Brown Inc. company. Brown & Brown is the seventh-largest broker worldwide according to the Best's Review list of Top Global insurance Brokers.

The hard market likely ended during the fourth quarter of 2004; the market began to see a slowdown in price increases and a leveling off in the first and second quarters of 2005. Going into the fourth quarter of 2005, combined ratios flatlined and came down significantly because the frequency of loss also dropped, Mortimer said. From 1999 to 2003, frequency increased significantly per 100 physicians. "We saw it decreasing in the end of 2004 and throughout 2005, and the decline of frequency continued through 2006," he said.

Significant price increases occurred in 1999 through calendar year 2004.At the same time, medical malpractice underwriters anticipated a continued frequency increase, which did not happen. "So in 2004, 2005 and for six months through 2006, we have a flatto-declining frequency trend; at the same time, prices stayed high in 2004 and 2005. So those two things converged at year-end, and we had significant profits in medical malpractice underwriting lines instead of significant losses" Mortimer said. "So we had a two-year trend in higher-than-anticipated profits and that leads to two things: relaxed underwriting and increased competition, which equals lower prices."

"The macro view is most physicians will see flat-to-decreasing prices in 2007," he said. "I wouldn't call it a soft market yet, but certainly the worst is behind us."

"Going into 2007 you're going to see very aggressive pricing as these companies have boatloads of cash. They're going to go out and spend it. That spurs the cyclical market of 'we're back to competition,'" Mortimer said.

"And thus begins the next soft market cycle." Yet there's a twist this time around, he said. In the past 40 years there have been four cycles of hard-and-soft markets. After the last hard market, however, "the vast majority of commercial insurance companies left the market: St. Paul, Frontier, PHICO, Farmers, MMI, etc.--an exiting list of commercial carriers that haven't been replaced by new commercial carrier capital."

Many commercial carriers either went bankrupt writing medical malpractice or left the line altogether because they couldn't make money at it, Mortimer said. Now the market has too few commercial, for-profit medical malpractice companies chasing the same risk pool. That's opened the door for not-for-profit mutual insurance companies, like those affiliated with trade group Physician Insurers Association of America, to take on "significant growth," he said.

Connecticut's Case

In Connecticut, the state of medical malpractice is pretty much a "good news/bad news" situation, said Denise Funk, chief executive officer of Connecticut Medical Insurance Co. in Glastonbury. CMIC is the lone domiciled medical-malpractice insurer in the state.

"Clearly in our state, commencing with 2001 or 2002, the rates did go up considerably. We're in the process of catching up with loss severity that trended up, as it did nationwide" Funk said. For 2006, the rates stayed the same as they were in 2005, as she expects they will stay for 2007.

"That's the good news," Funk said. "The less-good news is the severity trending continues upward at what our actuaries see as a 7.5% loss trend per year."

Rates, while stabilized, have seen a 250% rate increase over the period from 2001 to 2005, Funk said. "The rates are still very high. Without tort reform there isn't any basis to move them downward. Physicians are suffering from having to pay higher premiums even though they have stabilized."

Connecticut has the highest average severity Indemnity in the country, she said. The state's overall medical-malpractice payment for 2005 was $104 million, compared with the much larger state of Massachusetts at $123 million.

"It would appear the rate increases have stabilized, while the underlying severity has not,' Funk said. States that will see improvement are where tort reform was enacted. "Unfortunately we weren't able to get anything meaningful [enacted] here in our state."

The hard market affected CMIC profoundly. "What happened to us is, from 2000 to 2004 we actually were losing money," Funk said. "Now we're back on an even keel as of 2004. Our surplus is growing."

But the losses took their toll. "We were unfortunately downgraded by A.M. Best Co. from an 'A-' to 'B++'We're hoping for maybe a year-end [2006] upgrade," Funk said.

The only other medical malpractice carrier doing business in the state is ProMutual Group from Massachusetts. Physicians not with CMIC or ProMutual are currently with hospital captive groups, Funk said. There also are some surplus lines markets, she added.

Recent state legislation was "not insurance company friendly," Funk said. "For one thing, if you file for a rate increase of 7.5% or more, this essentially requires a public hearing, which of course is not a fun thing."

A second barrier to entry in Connecticut has to do with the type of forms CMIC uses--claims-made forms, which cover claims made for the period of time a physician-insured is covered. Physicians can purchase a tail to be added to the policy if they need to cancel it for any reason. But recently passed Connecticut legislation states that if a carrier comes into the state and writes business for five years, then leaves the state, the carrier has to provide free tails to all its insureds.

"For companies that might otherwise look into coming into the state, those are two elements that are going to be competitive barriers," Funk said.

Connecticut, at least, is looking at a continued hard market for the near future. Funk does not see her market softening unless radical changes am made in the state.

"We would need to see either some tort reform, which is not highly likely, or some relief, maybe the use of special courts to hear medical malpractice cases so there's more predictability," she said. "What we need is predictability of losses and reasonable regulation."

Going Soft?

The last true soft market in medical malpractice was in the 1990s, said Eric S. Poe, vice president of marketing and business development for Princeton-based New Jersey Physicians United Reciprocal Exchange. "But during the past six-to-seven years one number has gone up while others have gone down: the number of claims for medical malpractice in this country has not gone up since the year 2000, but the severity in claims has gone up significantly," Poe said. "Does it make any sense to tell me that in the last five years that the injuries have been worse?"

Less than 3% of all medical malpractice claims go to trial, Poe said. He attributes the rise in claim severity to the industry itself: "We settle claims."

"If I write higher limits, I'm going to have to settle high amounts," Poe said. "Insurance companies are very apprehensive of going to trial with high policy limits; they know they'll have to settle at a higher amount if they have a higher policy limit. That's what caused the medical malpractice crisis, in my opinion."

The market has been basing rates upon development that occurred in the past, minus investment income and higher policy limits, Poe said. "At some point the hard market has to stop because insurance companies will start making money, roll back their rates and compete with each other."

The Next Step

What happens with medical malpractice reform affects satellite industries as well, noted Mike Thoma, assistant vice president for Travelers technology underwriting division, which underwrites insurance for medical device manufacturers. If reform efforts are successful, it could force plaintiffs' lawyers "to look for other deep pockets," Thoma said. "And the medical device industry would certainly be next in line."

Most of the medical malpractice reform efforts to date have been at the state level, proposing legislation to provide protections for medical practitioners. "But it doesn't say anything about device manufacturers," Thoma said. His concern grows "as more and more states enact this legislation."

"When somebody is injured in a procedure involving a medical device--whether it's the fault of the practitioner who performs the procedure, or some flaw with the device itself--the device manufacturer is going to be brought in, particularly if the plaintiff is aware that there is going to be a cap on the amount that they can recover from the doctor," Thoma said.

Learn More

Aon Corporation Group

A.M. Best Company # 03341

Distribution: Directly owned broker distribution channels

Connecticut Medical Insurance Co.

A.M. Best Company # 10085

Distribution: Direct sales

New Jersey Physicians

United Reciprocal Exchange

A.M. Best Company # 12595

Distribution: Direct sales

St. Paul Travelers Cos.

A.M. Best Company # 58470

Distribution: Personal lines agencies, brokers, direct marketing, Internet

For ratings and other financial strength information about these companies, visit
Top 5 U.S Writers, Medical

Group market shares (%) are based on
direct premiums written.

MLMIC Group 4.6
Armer Intl Group Inc 7.5
Berkshire Hathaways Ins 6.2
ProAssurance Group 5.3
CNA Ins Cos 4.5

Source: Best's State/Line Reports

Note: Table made from bar graph.

Four States Lead the Frequency Decline

The substantial drop in hospital professional liability claims
frequency from accident year 2001 to 2003 in the California, Florida,
Pennsylvania and Texas results is most likely a result of legislative
reforms enacted in those states.

Year Frequency Per Bed

 C,A FL, PA, TX All Other State
2000 3.8% 2.8%
2001 3.3% 2.8%
2002 3.1% 2.9%
2003 2.7% 2.7%
2004 2.7% 2.6%
2005 2.6% 2.6%

Note: Table made from bar graph.

Source: Aon, Hospital Professional Liability and Physician Liability
2006 Benchmark Analysis
COPYRIGHT 2007 A.M. Best Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2007, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Property/Casualty
Author:Cavanaugh, Bonnie Brewer
Publication:Best's Review
Date:Jan 1, 2007
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